How to invest in cryptocurrencies

There are several ways to invest in cryptocurrencies. We differentiate two major categories:

Exchanges

Brokers

Exchange

Exchanges allow you to trade the assets listed on the exchange. Since the appearance of the first cryptocurrency, Bitcoin, many cryptocurrency exchanges have launched. When you buy an asset on a stock exchange you hold the physical asset. If you buy a cryptocurrency on an cryptocurrency exchange this means you will receive the key associated with the amount of cryptocurrency you bought. You can store this key in the wallet of the exchange or transfer your cryptocurrency (the key) to your wallet.

There are two categories of cryptocurrency exchanges :

Exchanges offering pairs with national currencies

Exchanges offering only cryptocurrencies pairs

Exchanges offering pairs with national currencies

Some exchanges allow the exchange of cryptocurrencies against national currencies. The process is therefore simplified for the investor who has the ability to transfer funds from his bank accounts to his cryptocurrency exchange account. Once funds are available on the account cryptocurrencies can be purchased.

Exchanges offering only cryptocurrencies pairs

It is necessary to hold cryptocurrencies to deal on these cryptocurrency exchanges. To get your initial cryptocurrencies it will be necessary to mine or to buy cryptocurrencies on a cryptocurrency exchange offering pairs with national currencies.

Brokers

As with most assets, specific brokers will enable you to buy cryptocurrencies. When using a broker for the purchase of cryptocurrencies you will notice that you do not become the owner of the underlying asset, the cryptocurrency you have purchased. As a matter of fact, if you use this method you will notice that you will not receive the key associated with the amount of cryptocurrency that you bought. This means that you will only be able to deal with that same broker when selling your cryptocurrency (or buying back if you opened a short position).

We have identified two types of brokers :

Brokers of financial instruments

Brokers specialized in cryptocurrencies

Brokers of financial instruments

Typically these brokers offer structured products called Contracts for Difference which are trackers of the specified cryptocurrency. So what you buy in reality is a tracker of a specified cryptocurrency. In the majority of cases you benefit from a leverage effect and you have the possibility to take long and short positions.

Brokers specialized in cryptocurrencies

When you buy a cryptocurrency with a cryptocurrency specialized broker, the broker buys the cryptocurrency on your behalf and stores it in his wallet. You do not benefit from leverage and you cannot take a short position.

Summary

Exchanges that offer pairs with national currencies simplify the investment process (buying cryptocurrencies) since you do not need to have a wallet.

However, Exchanges offering only cryptocurrencies pairs offer a wider range of cryptocurrencies, especially access to the less traded altcoins (usually the newer coins).

Brokers of financial products offer more flexibility (leverage, opening of short positions) and security (you do not hold the coin and it is therefore impossible to get hacked) however these services often result in higher fees.